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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2001 Commission File No. 001-14509
EASYRIDERS, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0811505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
28210 Dorothy Drive, Agoura Hills, California 91301
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (818) 889-8740
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $.001 per share
Securities Registered Pursuant to Section 12(g) of the Act:
Not Applicable
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
---
There were 25,481,112 shares of outstanding Common Stock of the Registrant as
of August 1, 2001.
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PART I -- FINANCIAL INFORMATION
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Item 1. Financial Statements
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
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(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 529,604 $ 192,492
Accounts receivable, less allowance for doubtful accounts
of $708,189 (2001) and $882,234 (2000) 2,417,861 2,008,505
Inventories 1,740,664 2,177,344
Prepaid publication costs 831,889 819,210
Prepaid expenses and other 1,120,533 849,844
Receivable from shareholder 267,533 278,374
----------- -----------
Total current assets 6,908,084 6,325,769
PROPERTY AND EQUIPMENT, net 801,026 841,158
GOODWILL, net of accumulated amortization of
$4,667,389 (2001) and $4,194,289 (2000) 25,783,924 26,257,024
OTHER ASSETS 138,492 172,670
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$33,631,526 $33,596,621
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See accompanying notes to consolidated financial statements.
1
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
June 30, December 31,
2001 2000
------------ ---------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 4,002,937 $ 5,237,813
Accrued payroll and payroll related expenses 255,320 1,204,786
Accrued interest payable 1,012,704 563,963
Other current liabilities 1,146,914 1,528,143
Income taxes payable 37,700 17,900
Current portion of deferred subscription and advertising income 4,473,015 3,941,853
Note payable (Note 3) 50,000 -
Current portion of long-term debt 21,863,238 21,832,113
------------ --------------
Total current liabilities 32,841,828 34,326,571
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NOTE PAYABLE TO STOCKHOLDER 8,000,000 8,000,000
LONG-TERM DEBT, net of current portion and debt discount 268,848 571,165
OTHER LONG-TERM LIABILITIES, including deferred
subscription revenues of $1,537,985 (2001) and $1,477,385 (2000) 2,403,890 3,529,359
REDEEMABLE COMMON STOCK (Note 3) 500,000 -
STOCKHOLDERS' DEFICIT:
Preferred stock, par value $.001 per share; 10,000,000 shares
authorized, none outstanding - -
Common stock, par value $.001 per share; 50,000,000 shares
authorized, 28,638,702 shares (2001) and 28,590,702 shares (2000)
issued, 24,138,702 shares (2001) and 28,590,702 shares (2000)
outstanding 28,638 28,590
Additional paid in capital 64,743,100 64,611,943
Receivable from the sale of stock, less allowance for doubtful
account of $5,100,000 (2000) - (2,200,000)
Accumulated deficit (74,254,778) (75,271,007)
Treasury stock, 4,500,000 shares of common stock at cost (900,000) -
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Total stockholders' deficit (10,383,040) (12,830,474)
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$ 33,631,526 $ 33,596,621
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See accompanying notes to consolidated financial statements.
2
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME/(OPERATIONS)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---------------------------- ----------------------------
CONTINUING OPERATIONS: (unaudited) (unaudited)
SALES $ 6,943,808 $ 7,279,153 $15,236,973 $15,684,591
COST OF SALES 4,987,143 6,026,961 10,440,640 12,823,698
----------- ----------- ----------- -----------
GROSS MARGIN 1,956,665 1,252,192 4,796,333 2,860,893
EXPENSES:
Selling, general and administrative 831,776 1,624,010 1,441,395 3,068,734
Depreciation and amortization 279,451 1,439,548 637,915 2,032,590
Stock issuance expenses - 22,342 - 195,584
----------- ----------- ----------- -----------
Total expenses 1,111,227 3,085,900 2,079,310 5,296,908
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 845,438 (1,833,708) 2,717,023 (2,436,015)
OTHER INCOME (EXPENSE) 69,083 (554,407) 119,293 (350,730)
INTEREST EXPENSE (796,978) (1,112,781) (1,787,362) (2,089,419)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 117,543 (3,500,896) 1,048,954 (4,876,164)
PROVISION FOR INCOME TAXES 16,300 2,001 32,725 9,852
----------- ----------- ----------- -----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS 101,243 (3,502,897) 1,016,229 (4,886,016)
DISCONTINUED OPERATIONS:
INCOME (LOSS) FROM OPERATIONS - (12,464) - 121,066
GAIN (LOSS) ON DISPOSAL - (2,100,000) - (2,100,000)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 101,243 $(5,615,361) $ 1,016,229 $(6,864,950)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE:
BASIC
CONTINUING OPERATIONS $ 0.004 $ (0.127) $ 0.039 $ (0.191)
DISCONTINUED OPERATIONS - (0.077) - (0.077)
----------- ----------- ----------- -----------
NET INCOME (LOSS) PER SHARE $ 0.004 $ (0.204) $ 0.039 $ (0.268)
=========== =========== =========== ===========
DILUTED
CONTINUING OPERATIONS $ 0.004 $ (0.127) $ 0.036 $ (0.191)
DISCONTINUED OPERATIONS - (0.077) - (0.077)
----------- ----------- ----------- -----------
NET INCOME (LOSS) PER SHARE $ 0.004 $ (0.204) $ 0.036 $ (0.268)
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 24,101,098 27,490,182 26,308,636 25,594,509
=========== =========== =========== ===========
DILUTED 26,235,312 27,490,182 28,482,524 25,594,509
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
3
EASYRIDERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
June 30,
2001 2000
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CONTINUING OPERATIONS: (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 1,016,229 $(4,886,016)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Stock issuance expenses - 195,584
Common stock issued for services 30,705 13,125
Common stock issued for interest - 39,890
Depreciation and amortization 637,915 2,032,590
Loss on sale of Easyriders of Columbus to related party - 532,818
(Gain) Loss on sale of fixed assets (59,437) 55,072
Gain on Martin Unwind (47,167) -
Loss on write-off of intangible - -
Amortization of debt issuance costs 157,386 157,386
Non-cash interest expense 100,500 150,049
Increase (decrease) in cash resulting from changes in operating accounts:
Current assets (245,203) (151,538)
Other assets - 122,337
Current liabilities (1,253,618) (248,942)
Other long-term liabilities 111,577 1,387,863
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Net cash provided by (used in) operating activities 448,887 (599,782)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 10,028 10,000
Purchases of fixed assets (150,611) (40,617)
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Net cash used in investing activities (140,583) (30,617)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of convertible debentures and debt - 383,775
Common stock issued for cash - 500,000
Proceeds from stockholders' and other advances 300,000 -
Payments on debt and capital leases (271,192) (157,386)
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Net cash provided by financing activities 28,808 726,389
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NET INCREASE IN CASH AND CASH EQUIVALENTS
FROM CONTINUING OPERATIONS $ 337,112 $ 95,990
CASH USED FOR DISCONTINUED OPERATIONS - (271,542)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 337,112 (175,552)
CASH AND CASH EQUIVALENTS, beginning of period 192,492 429,256
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CASH AND CASH EQUIVALENTS, end of period $ 529,604 $ 253,704
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SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 657,721 $ 852,055
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NON-CASH FINANCING ACTIVITIES:
Common stock issued in settlement of litigation $ - $ 325,000
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Common stock issued in settlement of debt $ - $ 3,446,787
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Common stock issued upon conversion of debentures $ - $ 379,149
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Redeemable common stock issued in settlement of accrued liability (Note 3) $ 155,000 $ -
============== ==============
Conversion of accrued liability to note payable (Note 3) $ 250,000 $ -
============== ==============
See accompanying notes to consolidated financial statements
4
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 (unaudited)
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1. GENERAL BASIS OF PRESENTATION
Easyriders, Inc. (Easyriders or the Company) was incorporated in the State
of Delaware on May 13, 1998, and for financial reporting purposes is the
successor to Newriders, Inc. (Newriders), a Nevada corporation. On
September 23, 1998, Easyriders, Inc. consummated a series of transactions
(collectively, the Reorganization), including the following: (i) the merger
of a subsidiary of Easyriders with and into Newriders (the Merger) upon
which the shareholders of Newriders exchanged their stock on a 2-for-1 basis
for Easyriders, Inc. common stock; (ii) the acquisition by Easyriders of all
of the outstanding common stock of Paisano Publications, Inc. (Paisano
Publications), a California corporation, and certain affiliated corporations
(collectively, the Paisano Companies); and (iii) the acquisition by
Easyriders of all of the outstanding membership interests of M&B
Restaurants, L.C. (El Paso), a Texas limited liability company.
As a result of the merger, the Newriders common stock was exchanged for
Easyriders common stock on the basis of one share of Easyriders common stock
for each two shares of Newriders common stock, and the stockholders of
Newriders immediately prior to the merger became stockholders of Easyriders.
The merger was accounted for as a combination of entities under common
control, similar to a pooling of interest. Therefore, the historical
financial statements represent the combined financial statements of
Easyriders and Newriders. The acquisitions of the Paisano Companies and El
Paso were accounted for as a purchase.
The Paisano Companies consist of Paisano Publications; Easyriders of
Columbus, Inc., an Ohio corporation; Easyriders Franchising, Inc., a
California corporation; Teresi, Inc. (DBA Easyriders Events, Inc.), a
California corporation; Bros Club, Inc., a California corporation and
Associated Rodeo Riders on Wheels, a California corporation; Paisano
Publications publishes 11 special-interest magazines directed to motorcycle,
hot-rod, and tattoo enthusiasts, and 2 industry related magazines, Eagles
Eye and Tatoo Industry. Other Paisano Companies market a line of apparel
and other products designed to appeal to motorcycle, hot-rod, and tattoo
enthusiasts. Through the end of 1999 Easyriders Franchising had established
franchise stores that sold Easyriders apparel, customized new and used
American-made motorcycles, and motorcycle accessories. Subsequently, all but
2 franchisees signed agreements converting their franchise arrangement to a
licensing arrangement and the operations of Easyriders Franchising were
assumed by Easyriders Licensing, Inc., a California corporation, and a
wholly-owned subsidiary of Newriders. Currently, there are 41 licensed
stores and 1 retail store still operating under an expired franchise
agreement.
El Paso owns and operates barbecue and smoked meat restaurants located in
Arizona and Oklahoma. The restaurants are operated under the name "El Paso
Bar-B-Que." On October 5, 2000, the Company sold its interest in El Paso
to a related party.
Easyriders currently derives substantially all of its revenues from the
operations of Paisano Publications.
Basis of presentation - The accompanying unaudited interim consolidated
financial statements of Easyriders, Inc. for the three and six month periods
ended June 30, 2001 and 2000, respectively, reflect all adjustments
(consisting of normal recurring accruals) which, in the opinion of
management, are necessary for a fair presentation of the results for the
interim periods presented.
5
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 (unaudited)
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These financial statements have been prepared in accordance with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
These financial statements should be read in conjunction with the Company's
annual audited financial statements for the year ended December 31, 2000.
Operating results for the three and six month periods ended June 30, 2001
are not necessarily indicative of the results that may be expected for the
full year ending December 31, 2001. In this regard, readers are cautioned
to consider the fact that on July 17, 2001, Easyriders and Paisano
Publications filed voluntary petitions for relief under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for the
Central District of California, San Fernando Valley Division (see No. 7,
below, entitled "Subsequent Events"). The immediate consequences of these
filings are discussed herein, but the longer-term consequences are
substantially uncertain at this time, and could include, among other things:
. An outright sale of assets for a price which is less than the Company's
total indebtedness, in which case it is possible that no value would
remain for shareholders.
. Restructuring of the Nomura Indebtedness through modified terms, or
replacing the Nomura Indebtedness with alternative financing.
. Restructuring or elimination, in whole or in part, of the Company's
unsecured debt.
. Cancellation or dilution of all, or a portion of, the Company's
currently outstanding common stock.
. Events which disqualify the Company from remaining a publicly traded
enterprise.
. Changes in ownership control and/or management of the Company.
This list in not intended to be exhaustive, nor to reflect management's
expectations as to the most likely outcome of the Chapter 11 cases, but
merely to serve as a notice to readers that the future of the Company is
substantially uncertain at this point in light of the issues still to be
resolved in the Bankruptcy Court.
The Company's financial statements are prepared using the generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The above referenced bankruptcy filings were prompted primarily
by various repayment demands and other disputes that Easyriders was having
with its primary secured lender, Nomura Holding America Inc. ("Nomura"),
including Nomura's unwillingness to extend the September 23, 2001 maturity
date of its secured loan in the principal amount of approximately $21
million. The unpredictability of the outcome of these bankruptcy filings
raises substantial doubt about the Company's ability to continue as a going
concern. For management's plans on emerging out of Chapter 11, see Note 2
and Note 7.
6
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 (unaudited)
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2. LONG-TERM DEBT
The Nomura Indebtedness - In November of 2000, Nomura asserted that the
Company was in default with respect to numerous non-financial matters based
on various negative covenants in the Nomura Credit Agreement. Management
took issue with each of these charges, and in good faith believed that no
events of default had occurred. Thereafter, Nomura took the position that
the "default rate" of interest should apply. For the reasons indicated, the
Company disputed this demand, on the basis that no triggering event had
occurred.
The Nomura Indebtedness, approximately $21.0 million, becomes due and payable
on September 23, 2001. In view of the Company's anticipated inability to
repay the entire Indebtedness by such date, and Nomura's unwillingness to
accept a lesser amount, or to extend the maturity date, in or about May 2001,
management began discussing with Nomura the possibility of filing voluntary
petitions under Chapter 11 of the Bankruptcy Code, which led to protracted
negotiations concerning a Cash Collateral Stipulation (the "CCS"). The CCS
was based upon a detailed budget which Nomura reviewed and ultimately
approved, subject to reserving all of its rights under the Nomura Credit
Agreement. The CCS Budget contemplates the payment of only "stated"
interest, and not the "default" interest rate of an additional 3%, plus "Net
Income" pursuant to a formula set forth in the CCS. Pursuant to the CCS, no
agreement was made between the Company and Nomura as to the application of
any such payments. Easyriders, Inc. and Paisano Publications filed voluntary
petitions under Chapter 11 of the Bankruptcy Code on July 17, 2001. They
continue to operate as "Debtors in Possession". At a hearing held on July
20, 2001, the Bankruptcy Court formally approved the CCS on an interim basis
pending a final hearing to be held on August 21, 2001. In accordance with
the CCS and the CCS Budget, the Company paid Nomura its interest payment for
the month of July 2001 at the stated rate. In addition, the Company paid
Nomura "Net Income" for July 2001 of $23,699. The Company's payment
obligations to Nomura are presently governed by the CCS, with which the
Company is in full compliance.
The Siena Loan - On April 13, 2000, Mr. Martin and Mr. Teresi each paid to
Siena the sum of $137,500 and assumed the position of Siena with respect to
the Siena Loan, with some modifications to the terms. For the quarter ended
March 31, 2001, the Company did not possess the resources to pay off this
$275,000 loan from Messrs. Teresi and Martin. As a result, as provided under
the modified terms, through March 13, 2001 an additional 225,000 warrants
vested to each of Mr. Martin and Mr. Teresi and the fair value of the
warrants, aggregating $100,500, was recorded as interest expense.
Effective March 30, 2001, in connection with the Martin Unwind transaction
(see Note 4 - Stockholders' Deficit), Mr. Teresi purchased Mr. Martin's one-
half interest in the Siena Loan, and all warrants vested thereunder, for cash
in the amount of $137,500. Concurrently, in an amendment to the terms of the
loan effective April 1, 2001, Mr. Teresi agreed to relinquish his right to
receive additional warrants.
3. REDEEMABLE COMMON STOCK
On February 1, 2001, to resolve a dispute over legal fees and expenses, the
Company entered into a settlement agreement with a law firm which had
provided litigation defense services for total consideration of approximately
$750,000. The settlement included (a) the delivery of a promissory note for
$250,000, which bears interest at the rate of 10% per annum and was due and
payable in full on April 30, 2001; and (b) the issuance of 500,000 shares of
Easyriders, Inc,
7
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 (unaudited)
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common stock. As of June 30, 2001, a balance of $50,000 plus accrued
interest remained outstanding under the promissory note. Under the terms of
the settlement agreement, on or after December 1, 2002, the law firm has the
right (a "put option") to cause Easyriders to purchase any or all of the
eligible shares at a price of $1.00 per share. As a result of the put
option held by the law firm, the mandatory redemption value of $500,000 has
been classified as redeemable common stock. The fair market value of the
500,000 shares issued under this agreement approximated $155,000 on the
settlement date, or $0.31 per share.
4. STOCKHOLDERS' DEFICIT
Related-Party Receivable from the sale of Stock - Shortly after the El Paso
Transaction, and as a consequence thereof, the Board of Directors and the
Company's Chairman, John Martin, began negotiating the terms and conditions
of a transaction which has become known as the "Martin Unwind," pursuant to
which Mr. Martin would resign as Chairman. Such negotiations concluded on
March 1, 2001, when the Company and Mr. Martin entered into a Settlement
Agreement (the "Martin Settlement"). Concurrently, Mr. Martin and the
Company's principal shareholder and a director, Joseph Teresi, entered into
a separate agreement concerning the purchase by Mr. Teresi of certain assets
of Mr. Martin (the "Martin Asset Purchase").
These two transactions affected (a) Mr. Martin's employment agreement with
the Company (the "Martin Employment Agreement"), (b) the Company's 1998
Executive Incentive Compensation Plan (the "Compensation Plan"), (c) a
limited-recourse promissory note in the principal amount of $5,000,000 owed
by the Company to Mr. Teresi (the "Teresi Note"), which is secured by a
full-recourse promissory note in the principal amount of $5,000,000 owed by
Mr. Martin to the Company (the "Martin Mirror Note"), (d) a promissory note
in the principal sum of $2,300,000 owed by Mr. Martin to the Company (the
"Martin Note"), (e) 6,000,000 shares of the Company's common stock, of which
2,395,823 were acquired by Martin through the issuance of the Martin Mirror
Note and the Martin Note, and (f) a promissory note in the principal sum of
$275,000 originally owed by the Company to Siena Capital Partners, LLC, (the
"Siena Note"), which note was subsequently sold to Mr. Martin and Mr.
Teresi, each as to a one-half interest.
Pursuant to the Martin Settlement and the Martin Asset Purchase:
. Mr. Martin resigned as a director and Chairman of the Board, effective
March 1, 2001. Concurrently, the other designated directors, William
Prather, Wayne Knyal and Daniel Gallery, also resigned.
. Mr. Martin agreed to offset all amounts due to him from the Company,
to waive future entitlements to receive salary payments under the
Martin Employment Agreement, and to waive the right to receive accrued
and future bonus payments under the Compensation Plan.
. The Company canceled the Martin Mirror Note and reduced the balance
due under the Martin Note to $1,200,000 (the "Adjusted Balance").
During the year ended December 31, 2000, the Company wrote-off $5.1
million of the Martin Mirror Note.
8
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 (unaudited)
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. Effective March 30, 2001, Mr. Martin paid the Adjusted Balance to the
Company, through (a) the surrender to the Company, for cancellation
and retirement, of 4.5 million shares of the Company's common stock
held by him (valued at $0.20 per share, or $900,000), and payment of
$300,000 in cash.
. Effective March 30, 2001, Mr. Teresi agreed to the cancellation of the
Martin Mirror Note and as to the Teresi Note, Mr. Martin provided Mr.
Teresi with a limited personal guarantee up to $3,000,000.
. Effective March 30, 2001, Mr. Teresi purchased from Mr. Martin, (a)
1,500,000 shares of the Company's common stock held by Mr. Martin for
cash in the amount of $300,000, and (b) Mr. Martin's one-half interest
in the Siena Note, and all warrants vested thereunder, for cash in the
amount of $137,500.
Stock Option Grants - During the six months ended June 30, 2001, pursuant to
the formula grant provision under the Company's 1998 Executive Incentive
Compensation Plan, the Company granted 45,000 options to non-employee
directors of the Company. SFAS No. 123, Accounting for Stock-Based
Compensation, encourages but does not require the Company to record
compensation cost for employee stock option grants. The Company has chosen
to continue to account for employee option grants using Accounting
Principles Board Opinion No. 25. No compensation expense has been
recognized for employee stock option grants.
5. LONG-TERM LICENSE AGREEMENT
Wholesale Product Sales and License Agreement - Effective March 28, 2001,
the Company, through its subsidiaries Paisano Publications, Inc. and
Easyriders Licensing, Inc. entered into a long-term license agreement (the
"Products Agreement") with Southern Steel Sportswear, Inc. ("SSS"), an
affiliate of Action Promotions, Inc., of Ormond Beach, Florida ("API"), in
connection with the Company's wholesale products division. The Company has
previously reported that in March 2000, it entered into a long-term license
agreement with API, in connection with the activities of its subsidiary,
Easyriders Events (the "Events Transaction"). Pursuant to the Events
Transaction, API acquired a merchandise purchase credit which as of March
28, 2001 amounted to $1,360,195 (the "API Credit").
Under the Products Agreement, the Company has outsourced to SSS all
activities pertaining to the design, manufacture, warehousing, shipping and
fulfillment of orders in connection with the sale of Easyriders-branded
apparel and related merchandise to its network of retail stores, each of
which (an "Easyriders Store") conducts business as "Easyriders of _____"
pursuant to a written license agreement, and through other retail
motorcycle-oriented stores. (See "Information about Easyriders Licensing,"
herein.) The Products Agreement is for a term of 10 years, with options to
renew for two additional 10-year terms. Pursuant to the Products Agreement,
the Company retains control over all other channels of distribution,
including direct sales via its Roadware catalog and Internet Web site, and
licensing of product opportunities to independent third parties (the "Retail
Channel").
The Products Agreement provides for an initial product inventory purchase of
$760,195, and the purchase of delivery and transition services, licensing
rights, customer lists, promotional support
9
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 (unaudited)
- --------------------------------------------------------------------------------
and related goods and services, all valued at $600,000. The total of these
figures, $1,360,195 was paid by SSS via cancellation of the API Credit.
During the quarter ended March 31, 2001, the Company recognized
approximately $585,000 of revenues from products sold and $500,000 from
services rendered in relation to the delivery of products, transition
support services, customer lists, and promotional support. During the
quarter ended June 30, 2001, the Company recognized an additional $175,000
of revenues from products shipped. The remaining balance of $100,000, less
accumulated amortization calculated using the straight-line method over the
license period of 10 years, is included in deferred revenues on the
accompanying consolidated balance sheet.
6. BUSINESS SEGMENTS
Information by Operating Segment - Operating segments are defined as
components of an enterprise for which separate financial information is
available that is evaluated regularly by the chief operating decision-maker,
or decision-making group, in deciding how to allocate resources and in
assessing performance. The Easyriders, Inc. chief operating decision-making
group is comprised of the chief executive officer and the officers who
report to him directly.
Easyriders Inc. has four reportable segments: publishing, goods and
services, franchising/licensing, and other events and operations. The
publishing segment includes magazine and catalog publishing and other
operations. The trade goods and services segment distributes motorcycle
apparel and other related goods to both intermediate and end-users and
offers motorcycle repair and services through a formerly owned Company
store. The franchising/licensing segment includes the franchising/licensing
of Easyriders motorcycle stores for distribution of equipment and apparel.
The other events and operations segment includes the coordination and
sponsorship of motorcycle related events and operations.
Easyriders, Inc. evaluates performance based on profit or loss from
operations before income taxes, not including nonrecurring gains and losses
and foreign exchange gains and losses. (The Company utilizes the other
events and operations segment as a venue for increased exposure for
publication sales.) The accounting policies of the operating segments are
the same as those described in the summary of significant accounting
policies. The financial results from continuing operations for Easyriders,
Inc.'s four operating segments have been prepared on a basis which is
consistent with the manner in which Easyriders, Inc.'s management internally
disaggregates financial information for the purposes of assisting in making
internal operating decisions. In this regard, certain common expenses have
been allocated among segments less precisely than would be required for
stand alone financial information prepared in accordance with generally
accepted accounting principles. Revenue attributed to geographic areas is
based on the location of the customer.
10
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 (unaudited)
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Publishing Goods And Food Service Franchising/ Other Operations Totals
Services Licensing
(in dollars)
- ----------------------------------------------------------------------------------------------------------------------------------
Sales external customers - Quarter ended
June 30, 2001 5,606,933 556,899 - - 779,976 6,943,808
- ----------------------------------------------------------------------------------------------------------------------------------
Sales external customers - Quarter ended
June 30, 2000 5,963,021 1,181,746 - - 134,386 7,279,153
- ----------------------------------------------------------------------------------------------------------------------------------
Sales external customers - Year-to-date
June 30, 2001 12,135,937 2,284,089 - - 816,947 15,236,973
- ----------------------------------------------------------------------------------------------------------------------------------
Sales external customers - Year-to-date
June 30, 2000 11,450,518 2,615,713 - - 1,618,360 15,684,591
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations - Quarter
ended June 30, 2001 975,680 83,457 - (10,095) 128,102 1,177,144
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations - Quarter
ended June 30, 2000 641,421 (182,488) - (173,887) (49,711) 235,335
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations -
Year-to-date June 30, 2001 2,174,101 903,359 - 30,078 138,117 3,245,655
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations -
Year-to-date June 30, 2000 733,333 (487,331) - (309,812) 407,505 343,695
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income (loss) from discontinued
operations - Quarter ended June 30, 2001 - - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income (loss) from discontinued
operations-Quarter ended June 30, 2000 - - (2,112,464) - - (2,112,464)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income (loss) from discontinued
operations - Year-to-date June 30, 2001 - - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income (loss) from discontinued
operations - Year-to-date June 30, 2000 - - (1,978,934) - - (1,978,934)
- ----------------------------------------------------------------------------------------------------------------------------------
Segment Assets at June 30, 2001 6,916,286 - - - 134,179 7,050,465
- ----------------------------------------------------------------------------------------------------------------------------------
Capital Expenditures YTD June 30, 2001 150,611 - - - - 150,611
- ----------------------------------------------------------------------------------------------------------------------------------
Depreciation/Amortization - Quarter ended
June 30, 2001 80,687 - - - - 80,687
- ----------------------------------------------------------------------------------------------------------------------------------
Depreciation/Amortization - Quarter ended
June 30, 2000 83,978 4,029 - 2,106 16,341 106,454
- ----------------------------------------------------------------------------------------------------------------------------------
Depreciation/Amortization - Year-to-date
June 30, 2001 159,209 - - - 5,606 164,815
- ----------------------------------------------------------------------------------------------------------------------------------
Depreciation/Amortization - Year-to-date
June 30, 2000 172,364 16,116 - 4,220 37,056 229,756
- ----------------------------------------------------------------------------------------------------------------------------------
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements is as follows:
11
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 (unaudited)
- --------------------------------------------------------------------------------
Quarter Ended Year-To Date
-----------------------------------
June 30, 2001:
Income from operations in segment disclosure $ 1,177,144 $ 3,245,655
Unallocated, selling, general and administrative expenses (331,706) (528,632)
-----------------------------------
Income (loss) from operations $ 845,438 $ 2,717,023
===================================
June 30, 2000:
Income from operations in segment disclosure $ 235,335 $ 343,695
Unallocated, selling, general and administrative expenses (2,069,043) (2,779,710)
-----------------------------------
Income (loss) from operations $(1,833,708) $(2,436,015)
===================================
As at June 30, 2001:
Segment assets $ 7,050,465
Cash and cash equivalents 529,604
Receivable from shareholder 267,533
Goodwill 25,783,924
-------------
Total assets $33,631,526
=============
Quarter Ended Year-To-Date
-----------------------------------
June 30, 2001:
Depreciation and amortization included in segment disclosure $ 80,687 $ 164,815
Amortization of goodwill 198,764 473,100
-----------------------------------
Depreciation and amortization $ 279,451 $ 637,915
===================================
June 30, 2000:
Depreciation and amortization included in segment disclosure $ 106,454 $ 229,756
Amortization of goodwill 1,333,094 1,802,834
-----------------------------------
Depreciation and amortization $ 1,439,548 $ 2,032,590
===================================
Revenues concerning principal geographic areas are as follows based on
customer location:
USA Canada Germany UK Australia Other Total
------------------------------------------------------------------------------------------------------
Q/E 6/30/01 $ 6,130,533 314,813 103,647 113,998 79,990 200,827 $ 6,943,808
Q/E 6/30/00 $ 6,285,493 265,497 117,117 123,043 106,184 381,819 $ 7,279,153
YTD 6/30/01 $13,750,465 578,966 196,452 229,339 183,931 297,820 $15,236,973
YTD 6/30/00 $13,650,394 529,852 252,877 248,229 212,301 790,938 $15,684,591
The Company's foreign operations consist primarily of international
newsstand sales and mail-order product sales. The Company does not have any
identifiable assets attributable to these foreign activities and does not
separately identify any expenses relating specifically to foreign
activities. Therefore, income before taxes and net income associated with
foreign activities is not presented.
12
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 (unaudited)
- --------------------------------------------------------------------------------
7. SUBSEQUENT EVENTS
Chapter 11 bankruptcy filing - On July 17, 2001, Easyriders and Paisano
Publications, (collectively "Easyriders"), filed voluntary petitions for
relief under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the Central District of California, San Fernando
Valley Division.
The bankruptcy filings were prompted primarily by various repayment demands
and other disputes that Easyriders was having with its primary secured
lender, Nomura Holding America Inc. ("Nomura"), including Nomura's
unwillingness to extend the September 23, 2001 maturity date of its secured
loan in the principal amount of approximately $21 million (the "Nomura
Debt"). Previously, Easyriders has reported extensively on its dealings with
Nomura, and the disputes in question. Notwithstanding these disputes, Nomura
and Easyriders entered into a cash collateral stipulation ("CCS") prior to
Easyriders' bankruptcy filings which will enable Easyriders to continue to
operate in the ordinary course of business and pay all necessary operating
expenses. Concurrently with such filings, Easyriders filed a motion seeking
emergency Bankruptcy Court approval of its CCS with Nomura.
The Bankruptcy Court held a hearing on July 20, 2001 at which time the CCS
between Easyriders and Nomura was approved on an interim basis pending a
final hearing to be held on August 21, 2001. No change in management or
control of Easyriders has occurred, and the companies' operations have
continued uninterrupted. The Bankruptcy Code prevents Easyriders from paying
any "pre-petition debt" except in accordance with a confirmed plan of
reorganization or as otherwise allowed by the Bankruptcy Court. Because the
publishing operations of Paisano Publications are constantly in progress and
depend upon a number of critic al vendors (such as printers, distributors
and paper suppliers), Easyriders is attempting to negotiate agreements to
pay certain critical vendors and seeking Bankruptcy Court approval of those
agreements. With respect to magazine printing and distribution, the
resolution of these issues is critical to the ongoing operations of
Easyriders. Easyriders expects all such issues to be resolved timely and
satisfactorily, but there can be no assurance that this will be the case.
Any untimely or adverse ruling, for example, could cause magazines to miss
critical "on sale" periods with respect to newsstands, which in turn could
cause a ripple effect with respect to lost revenues and losses due to
advertising refunds, subscription refunds, and the like. Such consequences
could be materially adverse to Easyriders.
With Nomura's consent, Easyriders has engaged the Westlake Village, CA-based
investment banking firm of Murphy Noell Capital ("MNC") to provide financial
advisory services, and Easyriders is currently in the process of seeking
Bankruptcy Court approval of their employment of MNC. MNC is presently in
the process of finalizing its presentation materials. Pursuant to the terms
of Easyriders' employment agreement with MNC, MNC will provide financial
advisory services to Easyriders in connection with Easyriders' pending
Chapter 11 bankruptcy cases and will assist Easyriders in connection with
the refinancing of Easyriders' debt to Nomura, the raising of additional
equity and/or the sale of Easyriders' assets, for the purpose, among other
things, of satisfying Nomura's debt.
13
EASYRIDERS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 (unaudited)
- --------------------------------------------------------------------------------
The Chapter 11 filings by Easyriders have resulted in the imposition of an
automatic stay with respect to the pursuit of any and all litigation and
other dispute-based claims against either Easyriders, Inc. or Paisano
Publications. The consequences of this development are discussed below under
Part 1 of Item II - Legal Proceedings. In addition, the American Stock
Exchange ("AMEX") has temporarily suspended trading in the Company's common
stock, pending further developments in the Chapter 11 cases. This suspension
was implemented on an informal basis. AMEX has taken no formal action with
respect to the de-listing of the Company's securities.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management's discussion and analysis of the results of operations and
financial condition of the Company should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto.
OVERVIEW
Easyriders is a corporation established under the laws of the state of
Delaware on May 13, 1998. Easyriders currently derives substantially all of its
revenues from Paisano Publications, having sold all of its interests in El Paso
in October 2000.
On September 23, 1998, Easyriders consummated a series of transactions
(the "Reorganization") comprised of the following: (a) the acquisition by
Easyriders from Joseph Teresi of all of the outstanding common stock of Paisano
Publications and certain affiliated corporations (the "Paisano Companies"),
engaged at the time in (i) publishing special-interest magazines relating
primarily to American-made "V-Twin" motorcycles and tattoo art, (ii) selling
branded motorcycle apparel and accessories through a mail-order catalogue,
events and franchise stores, (iii) producing motorcycle and tattoo-related
events, and franchising retail stores to market its branded motorcycle apparel
and accessories; (b) the acquisition by Easyriders of all of the outstanding
membership interests of El Paso, which at the time was engaged in the operation
of four restaurants under the name "El Paso Bar-B-Que"; and (c) the merger (the
"Merger") of a subsidiary of Easyriders with and into Newriders, Inc., a Nevada
corporation ("Newriders").
As a result of the Merger (i) each two shares of Newriders common stock,
par value $.01 per share (the "Newriders Common Stock") were exchanged for one
share of Easyriders common stock, par value $.001 per share ("Easyriders Common
Stock"), and the shareholders of Newriders immediately prior to the Merger
became stockholders of Easyriders, (ii) all of the outstanding options, warrants
and other convertible securities exercisable for or convertible into Newriders
Common Stock were exchanged for the right to purchase or convert into one-half
the number of shares of Easyriders Common Stock at an exercise price or
conversion ratio per share equal to two times the exercise price or conversion
ratio provided for in the stock option, warrant or other agreements evidencing
such options, warrants or other convertible securities, and (iii) Newriders, the
Paisano Companies and El Paso became wholly-owned subsidiaries of Easyriders.
The Merger was accounted for as a combination of entities under common control,
similar to a pooling of interest. Therefore, the historical financial statements
represent the combined financial statements of the Company and Newriders. The
acquisitions of the Paisano Companies and El Paso were accounted for as a
purchase.
The acquisition of the Paisano Companies had, and will continue to have, a
material impact on the Company's financial statements; accordingly, current and
future financial statements may not be directly comparable to the Company's
historical financial statements. In future periods, the amortization of
goodwill will significantly effect the Company's financial statements.
15
Use of EBITDA
The following comparative discussion of the results of operations and
financial condition of the Company includes, among other factors, an analysis of
changes in the operating income of the business segments before interest
expense, taxes, depreciation and amortization ("EBITDA") in order to eliminate
the effect on the operating performance of the Paisano Companies of significant
amounts of amortization of intangible assets and interest expense recognized
through the Reorganization. Further, the Company has added back non-cash charges
consisting of stock issuance expenses to derive an adjusted EBITDA ("Adjusted
EBITDA"). Financial analysts generally consider EBITDA to be an important
measure of comparative operating performance for the businesses of the Company
and its subsidiaries, and when used in comparison to debt levels or the coverage
of interest expense as a measure of liquidity. However, EBITDA should be
considered in addition to, not as a substitute for, operating income, net
income, cash flow and other measures of financial performance and liquidity
reported in accordance with accounting principles generally accepted in the
United States of America. Also, EBITDA, as calculated by the Company, may not be
comparable to similarly titled measures used by other companies.
16
Results of Operations
The following table sets forth certain operating data for Easyriders for the
three months ended June 30, 2001 and 2000:
Easyriders Paisano Companies Consolidated Consolidated
For the Three Months Ended June 30,
--------------------------------------------------------------
2001 2001 2001 2000
CONTINUING OPERATIONS: (unaudited)
SALES
Publishing $ - $5,606,933 $5,606,933 $ 5,963,021
Goods and services 556,899 556,899 1,181,746
Food service - - -
Franchising/Licensing - - -
Other operations 779,976 779,976 134,386
--------------------------------------------------------------
- 6,943,808 6,943,808 7,279,153
COST OF SALES
Publishing 3,904,815 3,904,815 4,628,733
Goods and services 431,849 431,849 1,214,933
Food service - - -
Franchising/Licensing - - -
Other operations 650,479 650,479 183,295
--------------------------------------------------------------
- 4,987,143 4,987,143 6,026,961
GROSS MARGIN
Publishing 1,702,118 1,702,118 1,334,288
Goods and services 125,050 125,050 (33,187)
Food service - - -
Franchising/Licensing - - -
Other operations 129,497 129,497 (48,909)
--------------------------------------------------------------
- 1,956,665 1,956,665 1,252,192
EXPENSES
Publishing 726,438 726,438 692,867
Goods and services 41,593 41,593 149,301
Food service - - -
Franchising/Licensing 10,095 10,095 173,887
Other operations 1,395 1,395 802
Unallocated expenses 269,451 62,255 331,706 2,069,043
--------------------------------------------------------------
269,451 841,776 1,111,227 3,085,900
INCOME (LOSS) FROM OPERATIONS
Publishing 975,680 975,680 641,421
Goods and services 83,457 83,457 (182,488)
Food service - - -
Franchising/Licensing (10,095) (10,095) (173,887)
Other operations 128,102 128,102 (49,711)
Unallocated (269,451) (62,255) (331,706) (2,069,043)
--------------------------------------------------------------
$(269,451) $1,114,889 $ 845,438 $(1,833,708)
==============================================================
NET INCOME (LOSS) FROM
CONTINUING OPERATIONS $(460,300) $ 561,543 $ 101,243 $(3,502,897)
NET INCOME (LOSS) FROM
DISCONTINUED OPERATIONS - - - (2,112,464)
--------------------------------------------------------------
NET INCOME (LOSS) $(460,300) $ 561,543 $ 101,243 $(5,615,361)
==============================================================
17
The following table sets forth certain operating data for Easyriders for the six
months ended June 30, 2001 and 2000:
Easyriders Paisano Companies Consolidated Consolidated
For the Six Months Ended June 30,
-----------------------------------------------------------
2001 2001 2001 2000
CONTINUING OPERATIONS: (unaudited)
SALES
Publishing - $12,135,937 $12,135,937 $11,450,518
Goods and services 2,284,089 2,284,089 2,615,713
Food service - - -
Franchising/Licensing - - -
Other operations 816,947 816,947 1,618,360
-----------------------------------------------------------
- 15,236,973 15,236,973 15,684,591
COST OF SALES
Publishing 8,497,210 8,497,210 8,988,531
Goods and services 1,266,229 1,266,229 2,631,814
Food service - - -
Franchising/Licensing - - -
Other operations 677,201 677,201 1,203,353
-----------------------------------------------------------
- 10,440,640 10,440,640 12,823,698
GROSS MARGIN
Publishing 3,638,727 3,638,727 2,461,987
Goods and services 1,017,860 1,017,860 (16,101)
Food service - - -
Franchising/Licensing - - -
Other operations 139,746 139,746 415,007
-----------------------------------------------------------
- 4,796,333 4,796,333 2,860,893
EXPENSES
Publishing 1,464,626 1,464,626 1,728,654
Goods and services 114,501 114,501 471,230
Food service - - -
Franchising/Licensing (30,078) (30,078) 309,812
Other operations 1,629 1,629 7,502
Unallocated expenses 460,309 68,323 528,632 2,779,710
-----------------------------------------------------------
460,309 1,619,001 2,079,310 5,296,908
INCOME (LOSS) FROM OPERATIONS
Publishing 2,174,101 2,174,101 733,333
Goods and services 903,359 903,359 (487,331)
Food service - - -
Franchising/Licensing 30,078 30,078 (309,812)
Other operations 138,117 138,117 407,505
Unallocated (460,309) (68,323) (528,632) (2,779,710)
-----------------------------------------------------------
$(460,309) $ 3,177,332 $ 2,717,023 $(2,436,015)
===========================================================
NET INCOME (LOSS) FROM CONTINUING
OPERATIONS $(919,492) $ 1,935,721 $ 1,016,229 $(4,886,016)
NET INCOME (LOSS) FROM
DISCONTINUED OPERATIONS - - - (1,978,934)
-----------------------------------------------------------
NET INCOME (LOSS) $(919,492) $ 1,935,721 $ 1,016,229 $(6,864,950)
===========================================================
18
The following tables set forth the EBITDA calculations for Easyriders for the
three and six month periods ended June 30, 2001 and 2000, respectively:
Paisano
Easyriders Companies Consolidated Consolidated
For the Three Months Ended June 30,
--------------------------------------------------------------------------
2001 2001 2001 2000
Continuing Operations:
Net income (loss) $(460,300) $ 561,543 $ 101,243 $(3,502,897)
Interest expense 179,252 617,726 796,978 1,112,781
Income tax expense 16,300 - 16,300 2,001
Depreciation/amortization expense - 279,451 279,451 1,439,548
--------------------------------------------------------------------------
EBITDA - Continuing Operations $(264,748) $1,458,720 $1,193,972 $ (948,567)
==========================================================================
Discontinued Operations:
Net income (loss) $ - $ - $ - $(2,112,464)
Interest expense - - - 135,784
Income tax expense - - - -
Depreciation/amortization expense - - - 256,780
--------------------------------------------------------------------------
EBITDA - Discontinued Operations $ - $ - $ - $(1,719,900)
==========================================================================
EBITDA $(264,748) $1,458,720 $1,193,972 $(2,668,467)
Add back stock issuance expense - - - 22,342
--------------------------------------------------------------------------
Adjusted EBITDA $(264,748) $1,458,720 $1,193,972 $(2,646,125)
==========================================================================
For the Six Months Ended June 30,
--------------------------------------------------------------------------
2001 2001 2001 2000
Continuing Operations:
Net income (loss) $(919,492) $1,935,721 $1,016,229 $(4,886,016)
Interest expense 479,215 1,308,147 1,787,362 2,089,419
Income tax expense 32,725 - 32,725 9,852
Depreciation/amortization expense 5,606 632,309 637,915 2,032,590
--------------------------------------------------------------------------
EBITDA - Continuing Operations $(401,946) $3,876,177 $3,474,231 $ (754,155)
==========================================================================
Discontinued Operations:
Net income (loss) $ - $ - $ - $(1,978,934)
Interest expense - - - 241,652
Income tax expense - - - -
Depreciation/amortization expense - - - 493,274
--------------------------------------------------------------------------
EBITDA - Discontinued Operations $ - $ - $ - $(1,244,008)
==========================================================================
EBITDA $(401,946) $3,876,177 $3,474,231 $(1,998,163)
Add back stock issuance expense - - - 195,584
--------------------------------------------------------------------------
Adjusted EBITDA $(401,946) $3,876,177 $3,474,231 $(1,802,579)
==========================================================================
19
Results of Operations of Easyriders Inc. and Subsidiaries
During the three months ended June 30, 2001, the Company generated net
income of $101,243, reflecting an improvement in results of $5,716,604, or 102%,
when compared with the net loss of $5,615,361 for the three months ended June
30, 2000. The net income for the six months ended June 30, 2001 was $1,016,229,
reflecting an improvement of $7,881,179, or 115%, when compared with the net
loss of $6,864,950 for the same period in the prior year. The improvement for
the three month period can be attributed to an improvement in gross margin of
$704,473, a $1,974,673 reduction in operating expenses, a $924,994 reduction in
interest and other expenses and income taxes, and a $2,112,464 decrease in loss
from discontinued operations. The improvement for the six month period can be
attributed to an improvement in gross margin of $1,935,440, a $3,217,598
reduction in operating expenses, a $749,207 decrease in interest and other
expenses and income taxes, and a $1,978,934 decrease in loss from discontinued
operations. Net income from continuing operations improved $3,604,140, or 103%,
for the three month periods from a net loss of $3,502,897 in 2000 to net income
of $101,243 in 2001, and $5,902,245, or 121%, for the six month periods from a
net loss of $4,886,016 in 2000 to net income of $1,016,229 in 2001.
On October 5, 2000, the Company sold all of the interests in El Paso. The
subsidiary is reflected as discontinued operations for both the three and six
month periods ended June 30, 2000 in the accompanying financial statements so
that the periods presented are comparable.
The Company's net income per share, both basic and diluted, improved $0.208
per share, or 102%, to $0.004 per share for the three months ended June 30,
2001, as compared to the net loss per share of $0.204 for the three months ended
June 30, 2000. Basic net income per share for the six month periods improved
$0.307 per share, or 115%, from a net loss of $0.268 per share in 2000 to net
income of $0.039 per share in 2001. Diluted net income per share for the six
month periods improved $0.304 per share, or 113%, from a net loss of $0.268 per
share in 2000 to net income of $0.036 per share in 2001. Basic and diluted net
income per share from continuing operations improved $0.131 per share, or 103%,
for the three month periods. Basic net income per share from continuing
operations improved $0.230 per share, or 120%, for the six month periods, while
diluted net income per share improved $0.227 per share, or 119%.
The Company experienced positive EBITDA in the amount of $1,193,972 and
$3,474,231 for the three and six month periods ended June 30, 2001,
respectively, compared with negative EBITDA of $2,668,467 and $1,998,163 for the
three and six month periods ended June 30, 2000, reflecting an improvement in
EBITDA of $3,862,439, or 145%, for the three month periods, and an improvement
in EBITDA of $5,472,394, or 274%, for the six month periods. Adjusted EBITDA
reflects the add-back of non-cash charges related to stock issuance expenses of
$22,342 and $195,584 for the three and six month periods ended June 30, 2000,
respectively. Stock issuance expense arise when shares are issued at a discount
from the market price. There were no stock issuance expenses in 2001. As a
result, for the three and six month periods ended June 30, 2000, the Company had
adjusted negative EBITDA of $2,646,125 and $1,802,579, respectively, resulting
in improvements in adjusted EBITDA of $3,840,097, or 145%, for the three month
periods, and $5,276,810, or 293%, for the six month periods. EBITDA from
continuing operations was $1,193,972 and $3,474,231 for the three and six month
periods ended June 30, 2001, respectively, compared with negative EBITDA from
continuing operations of $948,567 and $754,155 for the three and six month
periods ended June 30, 2000, reflecting an improvement in EBITDA from continuing
operations of $2,142,539, or 226%, for the three month periods, and an
improvement in EBITDA from continuing operations of $4,228,386, or 561%, for the
six month periods.
20
Results of Operations: Paisano Companies
The operating results of the Company for both the three and six month
periods ended June 30, 2001 and June 30, 2000 include the results for the
Paisano Companies.
The Paisano Companies' publishing segment includes sales generated from
subscription sales, newsstand sales and advertising sales related to the
Companies' special interest magazines. The related cost of sales includes
direct costs related to the sales, consisting primarily of printing, paper,
publication and distribution costs. The goods and services segment includes
sales generated from the sale of apparel and other products through its mail-
order catalogs, one retail store, and franchise/license programs. The related
cost of sales includes the costs of the apparel and other products. The
franchising/licensing segment includes sales generated through franchise fees
charged to the operating franchisees/licensees of the retail stores, which
segment has no material related cost of sales. Through March 2000, the Paisano
Companies' other segment primarily included Easyriders Events, Inc. (Events),
which generated substantially all of its revenues from the sale of tickets to
motorcycle rodeos, motorcycle shows, and tattoo shows. In March 2000, the
Company licensed its rights to produce and manage these events. Since then,
such revenues have been generated through royalties and license fees paid
pursuant to this Events outsourcing transaction. Cost of sales for the other
segment consists primarily of direct costs of promoting the events.
The Paisano Companies' total sales decreased $335,345, or 5%, from
$7,279,153 for the three months ended June 30, 2000 to $6,943,808 for the same
three months in 2001. Total sales for the six month periods decreased $447,618,
or 3%, from $15,684,591 for the six months ended June 30, 2000 to $15,236,973
for the same six months in 2001. These decreases can be substantially
attributed to a combination of 1) reduced revenues from Easyriders of Columbus
of $221,356 and $874,025 for the three and six month periods, respectively, as
a result of this store being sold in April 2000, 2) reduced revenues from
Easyriders Events of $75,378 and $1,035,854 for the three and six month periods,
respectively, as a result of a restructuring in March 2000 under which a third
party licensed the rights to produce and manage events and to sell event-
specific merchandise, 3) increased revenues from Paisano Publications of $31,159
and $1,508,219 for the three and six month periods, respectively, the six month
period increase resulting from the recognition of a $500,000 in revenues from
the products sold and services rendered under the terms of the licensing
arrangement with Southern Steel and the sale of $584,966 of merchandise to
Southern Steel.
The Paisano Companies' gross margin increased $704,473, or 56%, from
$1,252,192 for the three months ended June 30, 2000, to $1,956,665 for the three
months ended June 30, 2001. For the six month periods, gross margin increased
$1,935,440, or 68%, from $2,860,893 in 2000 to $4,796,333 in 2001. As a
percentage of sales, gross margin for the Paisano Companies increased from 17%
to 28% for the three month periods, and from 18% to 31% for the six month
periods. The increase in gross margin for both the three and six month periods
can be attributed to 1) an increase in gross margin in the publishing segment of
$367,830 and $1,176,740, respectively, primarily due to a combination of a)
increased sales resulting from higher cover prices, and b) cost savings from
reduced personnel, space rental, and travel, 2) an increase in gross margin of
$158,237 and $1,033,961, respectively, in the goods and services segment, of
which $500,000 of the increase for the six month period is attributable to the
Southern Steel licensing agreement, and the remainder is the result of increased
sales and decreased costs of personnel, space rent, and travel, and 3) an
increase in gross margin from the other operations segment of $178,406 for the
three month periods substantially attributable to the profit from the new `V-
Twin Expo' event, and a decrease in gross margin in this segment of $275,261 for
the six month periods, primarily resulting from the closure of our events
division in March 2000.
21
The Paisano Companies' income from operations improved $1,746,024, or 277%,
from a loss of $631,135 for the three months ended June 30, 2000, to income of
$1,114,889 for the three months ended June 30, 2001. The Paisano Companies'
income from operations improved $3,753,245, or 652%, from a loss of $575,913 for
the six months ended June 30, 2000, to income of $3,177,332 for the six months
ended June 30, 2001. The improvement for the three month periods can be
attributed to an improvement in gross margin of $704,473 combined with a
decrease in operating expenses of $1,041,551. The improvement for the six month
periods can be attributed to an increase in gross margin of $1,935,440 combined
with a decrease in operating expenses of $1,817,805. The decrease in operating
expenses for both the three and six month periods can be substantially
attributed to 1) reduced amortization expenses of $1,137,621 and $1,342,889,
respectively, resulting from the combination of a) an $866,470 accelerated
amortization of goodwill arising from the sale of Columbus in April 2000, and b)
the impact of the $25M write-off of goodwill effected December 2000, 2) reduced
expenses of $163,792 and $339,890, respectively, resulting from the closure of
Franchising, 3) reduced expenses of $92,115 and $273,722, respectively,
resulting from the closure of Columbus, and 4) reduction in stock issuance
expenses of $22,342 and $195,584, respectively.
Expenses of the Paisano Companies not allocated to any segment amount to
$62,255 and $68,323 for the three and six months ended June 30, 2001, and
$866,470 and $919,608 for the three and six months ended June 30, 2000. The
allocated expenses include payroll, promotion, and other general and
administrative expenses specifically attributable to the business segments. The
unallocated expenses represent legal and professional fees and other expenses
which are not specifically attributable to a particular business segment.
Payroll and related benefits for the Paisano Companies decreased $6,551, or
2%, from $300,036 for the quarter ended June 30, 2000 to $293,485 for the same
quarter in 2001, and decreased $62,608, or 10%, from $627,560 for the six
months ended June 30, 2000 to $564,952 for the same six months in 2001. These
decreases are the result of efforts to reduce costs by decreasing staff size.
Depreciation and amortization for the quarters ended June 30, 2001 and 2000
totaled $279,451 and $1,417,072, respectively, and for the six month periods
ended June 30, 2001 and 2000 totaled $632,309 and $1,975,198, respectively, of
which $198,764 and $473,100 for the three and six months ended June 30, 2001,
respectively, and $466,624 and $936,364 for the three and six months ended in
the prior year, respectively, relates to the amortization of the goodwill
created out of the Paisano Companies' acquisition by the Company. The decrease
in the amortization of goodwill, and in turn in the depreciation and
amortization in total, can be substantially attributed to the recording of a $25
million reduction of the balance in goodwill as a result of impairment as of
December 31, 2000. In addition, the amortization for both the three and six
month periods ended June 30, 2000 includes $866,470 of accelerated amortization
of the goodwill attributed to Easyriders of Columbus, as such store was sold
effective April 30, 2000.
Interest expense for the Paisano Companies decreased $117,718, or 16%, from
$731,233 for the quarter ended June 30, 2000 to $613,515 for the quarter ended
June 30, 2001. For the six month periods ended June 30, 2000 and 2001, interest
expense decreased $109,999, or 8%, from $1,409,768 to $1,299,769, respectively.
These decreases are primarily attributable to decreases in the prime rate, which
declined from an average of 8.9% for the six month period ended June 30, 2000,
to an average of 8.2% for the six month period ended June 30, 2001.
The net income for the Paisano Companies improved $2,685,847, or 126%, from
a loss of $2,124,304 for the three months ended June 30, 2000 to income of
$561,543 for the three months ended June 30, 2001. The net income for the six
month periods improved $4,742,101, or 169%, from a loss of $2,806,380 to income
of $1,935,721. The improvement in net income for both the three and six month
periods can be primarily attributed to the results of operations for Paisano
Publications, Inc. which
22
improved by $3,251,467 from a net loss of $2,674,233 to net income of $577,234
for the quarters ended June 30, 2000 and 2001, respectively, and improved
results by $5,314,890 from a net loss of $3,399,261 to net income of $1,915,629
for the six month periods then ended. EBITDA for the three month periods
improved by $1,428,505, from $30,215 for the three months ended June 30, 2000 to
$1,458,720 for the three months ended June 30, 2001. EBITDA for the six month
periods improved by $3,267,002 from $609,175 for the six months ended June 30,
2000 to $3,876,177 for the six months ended June 30, 2001.
The principal raw material used in the publishing operations of the Paisano
Companies is paper. Paper costs represented approximately 19% and 18% of Paisano
Publications' production, selling and other direct costs for the three months
ended June 30, 2001 and 2000, respectively, and approximately 18% and 17% for
the six months then ended. Certain commodity grades of paper have shown
considerable price volatility over the last decade. There can be no assurance
that future fluctuations in paper prices will not have a material adverse effect
on the Paisano Companies' results of operations or financial condition.
The profitability of the Paisano Companies' publishing segment is also
affected by the cost of postage and could be materially adversely affected if
there is an increase in postal rates. No assurance can be given that the
publishing segment can recoup paper or postal cost increases by passing them
through to its advertisers and readers. In addition, future fluctuations in
paper prices and/or postal rates could have a material effect on the results of
operations and financial condition of the publishing segments.
Liquidity and Capital Resources
The Company's primary cash requirements are to fund the Company's operating
costs (primarily paper, payroll and related expenses) and working capital needs
(primarily accounts receivable, inventory, prepaid expenses and debt service).
On June 30, 2001, the Company had negative working capital of $26 million due
primarily to the pending maturity of the Nomura Indebtedness of $21.0 million
and deferred subscription and advertising income of $4.5 million.
Cash provided by operating activities from continuing operations during the
six month period ended June 30, 2001 totaled approximately $0.4 million. The
operating net income of $1.0 million was increased by several non-cash charges
including $0.6 million for depreciation and amortization, $0.1 million for non-
cash interest expenses, and $0.2 million of amortization of debt issuance costs,
and offset by $0.1 million of gains from the Martin Unwind transaction and the
sale of fixed assets. Cash of $1.4 million was used for changes in operating
accounts.
Upon its acquisition by the Company, Paisano Publications obtained an
aggregate of $22,000,000 in Nomura Indebtedness. This financing was comprised of
a $17,000,000 senior term loan (the "Term Loan") and a $5,000,000 revolving loan
(the "Revolving Loan"). The proceeds from the Term Loan plus $3,500,000 of the
Revolving Loan were used to repay certain promissory notes issued to the
shareholder of the Paisano Companies in conjunction with the Paisano Acquisition
and to pay certain acquisition expenses. To the extent that Paisano Publications
is in compliance with the terms of the Nomura Indebtedness, any unused portion
of the Revolving Loan may be used by Paisano Publications for working capital
purposes. Available borrowings under the Revolving Loan are subject to the
approval of the Lender. At June 30, 2001, there were no available borrowings
under the Revolving Loan.
The Nomura Indebtedness is guaranteed (the "Guarantees") by the Company and
the Paisano Companies, other than Paisano Publications (the "Guarantors"). The
Nomura Indebtedness will mature on September 23, 2001, and bears interest at an
annual rate equal to the prime rate of the Lender from
23
time to time plus 1.85%, payable monthly. The Nomura Indebtedness and the
Guarantees are secured by a first priority security interest in substantially
all of the tangible and intangible assets (owned or hereafter acquired) of the
Company and the Paisano Companies, including all of the capital stock or equity
interests of the Paisano Companies and Newriders. The Nomura Indebtedness and
the Guarantees constitute the primary secured indebtedness of Paisano
Publications and Guarantors.
On July 17, 2001, Easyriders, Inc., and its principal operating subsidiary,
Paisano Publications, Inc. (collectively "Easyriders"), filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the Central District of California, San
Fernando Valley Division. The bankruptcy court filings were prompted primarily
by various repayment demands and other disputes that Easyriders was having with
Nomura, including Nomura's unwillingness to extend the September 23, 2001
maturity date of its secured loan. Notwithstanding these disputes, the parties
entered into a cash collateral stipulation prior to Easyriders' bankruptcy
filings which will enable Easyriders to continue to operate in the ordinary
course of business and pay all necessary operating expenses. Concurrently with
such filings, Easyriders filed a motion seeking emergency Bankruptcy Court
approval of its cash collateral stipulation with Nomura (the "CCS"). The
Bankruptcy Court held a hearing on July 20, 2001 at which time the Bankruptcy
Court approved the CCS on an interim basis pending a final hearing to be held on
August 21, 2001. No change in management or control of Easyriders has occurred,
and the companies' operations have continued uninterrupted.
With Nomura's consent, Easyriders has engaged the Westlake Village, CA-
based investment banking firm of Murphy Noell Capital ("MNC") to provide
financial advisory services, and Easyriders is currently in the process of
seeking Bankruptcy Court approval of their employment of MNC. MNC is presently
in the process of finalizing its presentation materials. Pursuant to the terms
of Easyriders' employment agreement with MNC, MNC will provide financial
advisory services to Easyriders in connection with Easyriders' pending Chapter
11 bankruptcy cases and will assist Easyriders in connection with the
refinancing of Easyriders' debt to Nomura, the raising of additional equity
and/or the sale of Easyriders' assets, for the purpose, among other things, of
satisfying Nomura's debt. Current management of Easyriders hopes to formulate a
Plan of Reorganization which will enable Easyriders to emerge from their Chapter
11 proceedings with a comprehensive restructuring of all of their debt.
Currently, the Company's payment obligations to Nomura are governed by the
CCS, and the detailed budget attached thereto (the "CCS Budget"). The CCS is
presently scheduled to expire on August 31, 2001. The Company has requested
Nomura to agree to extend the term of the CCS beyond August 31, 2001, but Nomura
has not yet responded. As a precautionary measure in case Nomura decides not to
extend the term of the CCS beyond August 31, 2001, the Company filed a motion
with the Bankruptcy Court for authority to continue using cash collateral beyond
August 31, 2001. The hearing for the Bankruptcy Court to consider approval of
the Company's motion for authority to continue using cash collateral beyond
August 31, 2001 is scheduled to be held on August 21, 2001, concurrently with
the final hearing on the CCS. Based upon the Company's operating performance,
the Company believes that the Bankruptcy Court should authorize the Company to
continue using cash collateral beyond August 31, 2001 even if Nomura decides not
to extend the term of the CCS beyond August 31, 2001, but there can be no
assurance that this will be the case. The Company anticipates it will be able
to comply with all payment obligations to Nomura under the CCS. Even if the CCS
is not extended, during the pendency of the Chapter 11 cases, Nomura is
prevented from foreclosing on its collateral pursuant to the automatic stay
provisions of the Bankruptcy Code absent a Bankruptcy Court order to the
contrary.
The Nomura Credit Agreement sets forth (a) requirements for payments to
Nomura out of Excess Cash Flow, and (b) conditions under which dividends can be
paid and advances made by Paisano Publications to the Company out of Excess Cash
Flow. These provisions have been superseded by the CCS, pursuant to which all
expenses of the Company and Paisano Publications, on a consolidated basis,
24
are being paid pursant to the CCS Budget. Additionally, the CCS Budget provides
for monthly payments to Nomura of any cash remaining after disbursements are
made in respect of budgeted expenses.
The Nomura Credit Agreement contains numerous operating and financial
covenants, including, but not limited to, payment of dividends, limitations on
indebtedness and the maintenance of minimum net worth, minimum working capital,
interest coverage ratios and the achievement of cash flow measures. As of June
30, 2001, the Company was not in compliance with any of such financial
covenants. In addition, as of March 1, 2001, the Company was not in compliance
with certain technical compliance provisions of the Nomura Credit Agreement. In
connection with the Company's bankruptcy filing, the CCS presently governs the
Company's payment and performance obligations to Nomura. The Company is current
on all payment obligations to Nomura under the CCS, and otherwise is in full
compliance with the CCS.
In connection with the Paisano Acquisition, the Company issued Subordinated
Seller Notes in the aggregate amount of $13,000,000 to Joseph Teresi, the sole
shareholder of the Paisano Companies prior to the Paisano Acquisition. The
Subordinated Seller Notes consisted of a subordinated promissory note in the
amount of $5,000,000, a limited recourse subordinated promissory note in the
amount of $5,000,000 secured by the Martin Mirror Note (as defined in the
applicable instruments) and a short-term subordinated promissory note in the
amount of $3,000,000. The first two notes (the "Subordinated Notes") bear
interest at an annual rate that escalates from 6% to 10% and may be extended for
an additional five years. The remaining $3,000,000 (the "Short Term Note") was
initially issued as a 90 day note that bears interest at an annual rate of 10%.
On April 3, 2000, the then remaining principal and interest balance on the
$5,000,000 subordinated promissory note was exchanged for 3,356,710 shares of
Easyriders, Inc. Common Stock issued to Mr. Teresi. Mr. Teresi has agreed to
defer collection of current interest on the remaining $8,000,000 of the
Subordinated Seller Notes until after March 2002.
In October 1999, Paisano Publications issued a $275,000 increasing rate
secured promissory note to an investment partnership, Siena Capital Partners,
L.P. This loan (the "Siena Loan") is subordinate to the Nomura Indebtedness.
The loan bears interest at a rate of 20% per annum (increasing by 1% monthly
beginning April 14, 2000), and is due and payable with accrued interest on
October 14, 2000. Warrants to purchase 100,000 shares of the Common Stock of the
Company were issued with an exercise price of $0.01 per share. If the Siena
Loan has been paid off in its entirety by April 13, 2000, the warrants become
null and void. In addition, if the balance is not paid in full by July 13, 2000,
the Company must issue warrants to purchase an additional 300,000 shares of the
Common Stock of the Company, and if the balance is not paid in full by October
13, 2000, the Company must issue warrants to purchase an additional 100,000
shares of the Common Stock of the Company. Thereafter, until the loan is paid
off in full, the Company must issue warrants to purchase 150,000 shares of the
Common Stock of the Company on the 13th day of each month.
As of April 13, 2000, the Company did not possess the resources to pay off
the Siena Loan. However, John Martin and Joseph Teresi were granted a right of
first refusal in connection with any assignment of the Siena Loan. Based on
this right, the Company pursued negotiations with Mr. Teresi and Mr. Martin
concerning their assumption of the Siena Loan upon terms more favorable to the
Company. These negotiations were successful and on April 13, 2000, Mr. Martin
and Mr. Teresi each paid to Siena the sum of $137,500 and assumed the position
of Siena with respect to the Siena Loan. Concurrently, the first 100,000
warrants vested, and Mr. Martin and Mr. Teresi agreed to make the following
modifications to the Siena Loan terms:
. The interest rate was reduced from 20% per annum to 13% per annum.
25
. Provided the Siena Loan is paid off by December 31, 2000, twenty percent
(20%) of all warrants vested by and through such date will be surrendered.
As of December 31, 2000, the Company did not possess the resources to pay
off the Siena Loan. As a result, as provided under the modified terms, an
additional 350,000 warrants vested to each of Mr. Martin and Mr. Teresi. In
addition, as of March 13, 2001, the Company still did not possess the resources
to pay off the Siena Loan and, as a result, an additional 225,000 warrants
vested to each of Mr. Martin and Mr. Teresi. As of March 30, 2001, Mr. Teresi
aquired all of Mr. Martin's interest in the Siena Loan, and all warrants vested
up to such date. Concurrently, in an amendment to the terms of the loan, Mr.
Teresi relinquished the right to receive additional warrants.
On October 5, 2000, the Company sold all interests in El Paso Bar-B-Que
Company to a newly formed subsidiary of Culinary Holdings, Inc. for a
combination of cash in the amount of $4,000,000 and the assumption of
liabilities in the amount of approximately $6,700,000. In accordance with the
terms of the sale transaction, the Company forgave a net intercompany receivable
of $782,753. In addition, Culinary Holdings assumed $1,000,000 of convertible
debentures held by a director of the Company, who thereupon released the Company
from any obligation in connection therewith.
The Company, as it is currently configured, is presently able to meet its
liquidity obligations, by reason of the protections afforded by Chapter 11 and
the CCS. If management is successful in formulating a Plan of Reorganization
which is confirmed by the Bankruptcy Court, it is anticipated that upon emerging
from Chapter 11 the Company will continue to be able to meet its liquidity
obligations, based on a restructured balance sheet. A sale of the Company's
assets is also a possible outcome of the Company's Chapter 11 case. In any
event, the Company cannot now predict the outcome of the Chapter 11 cases.
Forward-Looking Information and Certain Factors
Certain statements in this Form 10-Q and in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases,
and in oral statements made by or with the approval of an authorized executive
officer constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The
forward-looking statements are subject to numerous risks and uncertainties that
could cause actual results to differ materially from those set forth in such
forward-looking statements. Such risks and uncertainties include, without
limitation, risks associated with future capital needs, management of growth,
availability of adequate financing, integration of business operations,
concentration of stock ownership, restrictions imposed on the Company by the
Lender, the magazine publishing and restaurant business, paper, and other raw
material prices and other factors discussed herein, in the Company's
Prospectus/Proxy Statement on Form S-4 dated September 8, 1998 and other filings
submitted to the Securities and Exchange Commission.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities, was issued in June 1998 and
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 was initially effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. In July 1999, SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
26
FASB Statement No. 133, was issued which delays the effective date of SFAS No.
133 to fiscal years beginning after June 15, 2000. The Company does not believe
that the adoption of this new standard will have a material impact on its
financial position or results of operations.
In December 1999, the SEC staff issued Staff Accounting Bulletin (SAB) No.
101, Revenue Recognition in Financial Statements, which became effective
December 2000. SAB No. 101 summarizes the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The application of this SAB did not have a material effect on the
Company's revenue recognition policies.
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44 of Accounting Principles Board Opinion No. 25 Accounting
for Certain Transactions Involving Stock Compensation, which, among other
things, addressed accounting consequences of a modification that reduces the
exercise price of a fixed stock option award (otherwise known as repricing). If
the exercise price of a fixed stock option award is reduced, the award must be
accounted for as variable stock option plan from the date of the modification to
the date the award is exercised, is forfeited, or expires unexercised. The
exercise price of an option award has been reduced if the fair value of the
consideration required to be paid by the grantee upon exercise is less than or
potentially less than the fair value of the consideration that was required to
be paid pursuant to the award's original terms. The requirements about
modifications to fixed stock option awards that directly or indirectly reduce
the exercise price of an award apply to modifications made after December 15,
1998, and will be applied prospectively as of July 1, 2000. The adoption of
this interpretation did not impact the Company's financial statements.
In January 2001, the Financial Accounting Standards Board Emerging Issues
Task Force issued EITF 00-27 effective for convertible debt instruments issued
after November 16, 2000. This pronouncement requires the use of the intrinsic
value method for recognition of the detachable and imbedded equity features
included with indebtedness, and requires amortization of the amount associated
with the convertibility feature over the life of the debt instrument rather than
the period for which the instrument first becomes convertible. Inasmuch as all
debt instruments that were entered into prior to November 16, 2000 and all of
the debt discount relating to the beneficial conversion feature was previously
recognized as expense in accordance with EITF 98-5, there is no impact on these
financial statements. This EITF 00-27, could impact future financial
statements, should the Company enter into such agreements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to a variety of risks, including paper price
volatility, postal rate increases and changes in interest rates affecting the
cost of its debt.
Paper Price Volatility
A primary component of the Company's cost of sales in the magazine
publishing segment is the cost of paper. Consequently, increases in paper
prices can adversely impact the Company results of operations.
Interest Rates
The Company is subject to certain interest rate risk related to the Senior
Loans. The Senior Loans mature on September 23, 2001 and bear interest at an
annual rate equal to the prime rate of the Lender plus 1.85% payable monthly.
Excluding any effect from the Default Rate of interest asserted by
27
Nomura, the interest rate on the balance of $20,991,701 outstanding on June 30,
2001 was 8.60 %. An increase in interest rates of 1% would result in an increase
in interest expense of approximately $210,000.
The Company's remaining long-term debt has fixed interest rates and
therefore the Company does not believe an increase in interest rates would have
a material impact on the Company's consolidated financial statements.
PART II -- OTHER INFORMATION
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Item 1. Legal Proceedings.
The Hatcher Litigation
On April 28, 2000, an action was filed in the U.S District court for the
Central District of California (Los Angeles) by Leon Hatcher, Richard Stafford
and entities controlled by them, naming as defendants the Company, Newriders,
Paisano Publications, El Paso, Easyriders Franchising, Easyriders Licensing,
Easyriders of Ohio, and the following current or former officers and/or
directors of the Company: John Martin, William Prather, Joseph Teresi, J. Robert
Fabregas, William Nordstrom, Robert Davis, Ellen Meagher, Joseph Jacobs, Daniel
Gallery, Wayne Knyal, and Grady Pfeiffer (the "Hatcher Action"). The complaint
also named as a defendant James E. Salven, Trustee in Bankruptcy in connection
with the Pierce Action, previously disclosed by the Company.
The Hatcher Action alleged wrongful conduct on the part of the named
defendants in connection with Mr. Hatcher's past and current relationship with
Easyriders and Newriders, including: (a) his role and ownership position in
Newriders prior to the Reorganization, (b) his role and participation in the
Reorganization, (c) his acquisition of shares of Easyriders as a consequence of
the Reorganization, (d) transactions involving the shares held by Mr. Hatcher in
Newriders and Easyriders, (e) the Company's Events business and his role
therein, (f) the Company's event merchandise business and Mr. Hatcher's role
therein, (g) the use and possession by Mr. Hatcher of property and vehicles used
in connection with the Events and event merchandise business of the Company, (h)
the acquisition by Mr. Hatcher and Mr. Stafford of franchises to operate retail
stores under the "Easyriders" name pursuant to various written agreements, and
(i) the termination of such franchise agreements by the Company in April, 2000.
The complaint asserted wrongful conduct by defendants in connection with
the foregoing under a wide range of legal theories, including violations of the
Securities Act of 1933, the Securities Exchange Act of 1934, the California
Corporations Code, Federal Trade Commission Disclosure Rules, the California
Franchise Investment Law Laws and the Federal RICO statute (18 U.S.C. sections
1961-1968); breach of fiduciary responsibilities; fraud, negligent
misrepresentation, breach of contract, infliction of emotional distress,
interference with contracts and business relations, unfair competition and
defamation. Certain of the causes of action were presented as derivative claims,
brought on behalf of Easyriders and/or Newriders against one or more individual
defendants. The action sought general and compensatory damages in amounts to be
proven at the time of trial, contract damages of $450,000, punitive damages,
injunctive and declaratory relief, and the appointment of a receiver.
On July 31, 2000, the U.S. District Court in Los Angeles issued an order
dismissing the Hatcher Action in its entirety, based on a motion brought by
defendants challenging the complaint as being in violation of applicable rules
requiring that complaints in Federal court set forth a "short and plain"
statement of the basis for relief, and that allegations of fraud be specific as
to all details. The order
28
granted plaintiffs 30 days to file a new complaint, stating that any amended
complaint "must be a short, plain statement which is concise, simple and direct
in compliance with Rule 8 (a). Furthermore, allegations of fraud,
misrepresentation and securities fraud must be alleged with particularity in
compliance with Rule 9." Subsequently, Plaintiff has filed two amended
complaints which the Company has challenged for similar reasons. On January 29,
2001, the court heard the Company's motion to dismiss the plaintiffs' Second
Amended Complaint (the "SAC"). On July 23, 2001, the court issued a lengthy,
detailed ruling in which it specified substantially all of the pleading defects
affecting the SAC, and granted defendants' motion in the entirety. Except for
certain securities law claims dismissed with prejudice, the ruling granted
plaintiffs 30 days to make "one final attempt" to file a Third Amended Complaint
("TAC"), indicating that the court "will dismiss the plaintiffs' claims with
--- ----
prejudice if their TAC suffers from any of same deficiencies cited herein."
- ---------
The Company believes it has substantial defenses to any amended complaint
plaintiff's may pursue or file in this action. In any event, in light of the
Company's Chapter 11 filing, prosecution of the case against the Company is
presently stayed pursuant to the automatic stay provisions of section 362 of the
Bankruptcy Code. Technically, this stay does not apply to the individual
defendants, although prosecution of the case against them may require plaintiffs
to obtain certain procedural relief such as bifurcation the cases against the
Company and the Non-Debtor Defendants.
Based on the current pleadings, the Company and its officers and directors
are insured under a policy providing indemnification for damages arising from
securities claims and the misconduct of its management, and have received
confirmation from their carrier ("D&O Carrier") that the Hatcher Action claims
are covered by such policy. It is possible, however, that claims could still be
asserted under the latest court ruling which are not covered by insurance.
As to the Company, the outcome of this action will depend significantly on
how the Company's Chapter 11 case proceeds. If plaintiffs pursue the case
through a TAC which is not subsequently dismissed, the surviving claims against
the Company would become part of the pool of general pre-petition unsecured
debt. Unless the surviving claims are resolved through a negotiated settlement,
they would be adjudicated through an adversary proceeding in the Bankruptcy
Court or litigation in the existing forum. Regardless, in light of all of the
foregoing considerations, the outcome of the Hatcher Action is not expected to
be materially adverse to the Company.
The Pierce Litigation
The Company has previously reported on the legal action involving Rick
Pierce, a former shareholder of Newriders, including (a) Mr. Pierce's Chapter 7
bankruptcy proceeding pending in the United States Bankruptcy Court, Eastern
District of California, Fresno Division, Case No. 98-19101-A-11, which was
commenced as an involuntary proceeding and then converted to a Chapter 11 case
with the debtor, Rick Pierce, in possession, and (b) the Company's adversary
proceeding against the Pierce Bankruptcy Estate and other parties who claim an
interest in shares of the Company acquired through various transactions with Mr.
Pierce. This action involves claims and counterclaims arising out of the 1998
Reorganization in which Mr. Pierce sought damages of at least $20 million.
As a consequence of the previously-reported (a) settlement conference in
September, 1999 before Judge Montali, (b) the arrest and indictment of Mr.
Pierce on 29 counts of conspiracy, mail fraud and money laundering (c)
conversion of the bankruptcy proceeding from Chapter 11 to Chapter 7, (d)
dissolution of the creditor's committee and (e) appointment of a trustee to
administer the bankruptcy estate (the "Trustee"), as well as the subsequent
criminal conviction of Mr. Pierce on multiple felony counts, the Pierce Action
has been relatively dormant for the past 14 months. During this period, the
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company pursued settlement discussions with the Trustee, James Salven, through
his counsel, Bill Lee. In December 2000, the Trustee approved a settlement
providing for dismissal of the Pierce Action in exchange for payment to the
Pierce bankruptcy estate of 350,000 shares of the Company's common stock,
representing the exact amount of shares due Mr. Pierce in accordance with his
obligations in the Reorganization, plus an additional 20,000 shares. In this
regard, a definitive settlement agreement was prepared and circulated, but just
as negotiations to finalize the Settlement Agreement were coming to a close,
Bill Lee was appointed to the bench, forcing James Salven to retain new counsel.
For this purpose he selected Bruce Leichty, a Fresno attorney who previously had
represented the Creditors Committee during the period that Pierce was a Chapter
11 Debtor-in-Possession. Mr. Leichty subsequently took the position that he
would not sign it without substantial, substantive revision, including the
payment of several hundred thousand dollars to the Piece bankruptcy estate.
The court which has jurisdiction over this case has established a schedule
for discovery and progress towards trail. However, in light of the Company's
Chapter 11 filing, prosecution of the case against the Company is presently
stayed pursuant to the automatic stay provisions of section 362 of the
Bankruptcy Code. Technically, this stay does not apply to the individual
defendants, although prosecution of the case against them may require plaintiffs
to obtain certain procedural relief such as bifurcation the cases against the
Company and the Non-Debtor Defendants.
While the Company believes the Pierce Action is without merit, the exact
outcome will depend significantly on how the Company's Chapter 11 case proceeds.
The claims against the Company are part of the pool of general pre-petition
unsecured debt. Unless these claims are resolved through a negotiated
settlement, they would be adjudicated through an adversary proceeding in the
Bankruptcy Court or litigation in the existing forum. Regardless, in light of
all of the foregoing considerations, the outcome of the Pierce Action is not
expected to be materially adverse to the Company.
The Kaye, Scholer Litigation
On April 19, 2000, the Company filed an action in Los Angeles County
Superior Court against the law firm of Kaye, Scholer, Fierman, Hays & Handler,
LLP, now known as Kaye Scholer LLP ("Kaye Scholer"), which represented
Newriders, Inc. in the Reorganization of 1998 (the "Kaye Scholer Action"). The
Kaye Scholer Action alleges that defendant, and the responsible attorneys
individually, committed legal malpractice, rendered negligent advice and
breached attorney-client fiduciary duties by failing to protect the Company's
interests in connection with the indemnification agreement entered into by and
between Newriders, as Buyer, and Paisano Publications, Inc., as Seller, in the
Reorganization. The complaint alleges that as a consequence of such
malpractice, the Company incurred costs in excess of $2.5 million in connection
with the previously reported Steel Horses Arbitration, and seeks recovery of
such sums, and other damages. In the action, Kaye Scholer has filed a cross-
complaint seeking recovery of unpaid legal fees in the amount of approximately
$100,000. Discovery in this action is now substantially complete, and the
parties remain too far apart in their positions for meaningful settlement
discussions to take place at this time.
Kaye Scholer's claim for unpaid legal fees has been stayed pursuant to the
Company's filing for Chapter 11 relief, and this claim is now part of the
Company's pool of pre-petition unsecured debt. The Company's claims against Kaye
Scholer are an asset of the Chapter 11 estate, and will be pursued by the
Company.
The Richard Dillon Litigation
On May 9, 2000, a complaint was filed by Richard Dillon ("Dillon") against
Easyriders in the Superior Court of Maricopa County, Arizona (the "Dillon
Action"). Dillon is a former employee of El
30
Paso. The Action alleges that Dillon is entitled to damages for breach of
contract and as a Wage Claim under Arizona law, arising out of an alleged
promise on the part of Easyriders to deliver shares of stock of Easyriders to
Dillon. The Dillon Action seeks contract damages of approximately $162,000,
treble damages under Arizona law of not less than $500,000 and the recovery of
attorney's fees. The contract in question arises out of the former employment of
Dillon with M&B. Easyriders is the sole named defendant in the Dillon Action,
and disputes the claims of Dillon therein.
While the Company believes it has substantial defenses to the Dillon
Action, the exact outcome will depend significantly on how the Company's Chapter
11 case proceeds. The claims against the Company are part of the pool of
general pre-petition unsecured debt. Unless these claims are resolved through a
negotiated settlement, they would be adjudicated through an adversary proceeding
in the Bankruptcy Court or litigation in the existing forum. Regardless, in
light of all of the foregoing considerations, the outcome of the Dillon Action
is not expected to be materially adverse to the Company.
The Greg King Litigation
On August 2, 1999, Greg King ("King") filed an action against the Company
and its subsidiary, Newriders, in of certain officers of Newriders. On December
23, 1999, an amended complaint was filed naming as additional defendants, Leon
Hatcher, Michael Purcell and Bill Doyle, each a former officer and/or director
of Newriders Los Angeles County Superior Court (the "King Action"), seeking
damages of (a) not less than $500,000 for the alleged breach of an oral
agreement to deliver certain shares of Newriders, Inc. in 1998, and (b)
approximately $100,000 for breach of an alleged oral agreement to reimburse King
for certain advances made by Mr. King on behalf of Newriders in 1998. The King
Action also seeks these damages on the basis of alleged fraud on the part.
The allegations of Mr. King arise out of his employment with Newriders in
Fresno, California, and his associations with Leon Hatcher and Rick Pierce,
identified above. After extensive pre-trial investigation, the Company
determined it had substantial defenses to the King Action, but could not be
assured of a favorable outcome. The Company tendered the King Action to its D&O
Carrier, which indicated a willingness to contribute towards settlement of this
action. This matter was scheduled for trial on April 30, 2001, but as the result
of negotiations between King, the Company, and the D&O Carrier, this action was
settled as of April 25, 2001. Under the terms thereof, which were reduced to a
written settlement agreement (the "Settlement Agreement"), the D&O Carrier
agreed to pay King $75,000, the Company agreed to issue to King and his
attorneys a total of 125,000 shares of common stock of the Company, and the
Company agreed to issue to King a promissory note for $15,000. Prior to the
Company's filing its petition for Chapter 11 relief on July 17, 2001 the cash
proceeds were delivered to King and the note and share certificates were
delivered to the Company's counsel. Upon receipt of the signed settlement
agreement, which the Company expects to receive shortly, the note and share
certificates will be released and the settlement shall at such time become
perfected.
If King does not return the signed Settlement Agreement, the note and share
certificates will not be issued, and consummation of the settlement would become
uncertain. In such event, any claims of King not resolved through the
settlement process would be subject to the automatic stay provisions of section
362 of the Bankruptcy Code, and would become part of the general pool of pre-
petition unsecured debt (including King's claim under the note). In light of
all of the foregoing considerations, the outcome of the Dillon Action is not
expected to be materially adverse to the Company.
31
Estate of Henry Wise v. Easyriders, Inc. et al
On April 12, 2001 a complaint was filed in the Horry County (South
Carolina) Court of Common Pleas by Genevieve Beach, as Personal Representative
of the Estate of Henry F. Wise, II, deceased, naming as defendants the Company
and the Myrtle Beach Speedway (the "Wise Action"). The Wise Action arises out
of the death of Mr. Wise while participating in a motorcycle stunt event at the
Myrtle Beach Speedway in May of 1999 and seeks unspecified damages as the result
of alleged negligence on the part of defendants with respect to safety
precautions in connection with the event. The event was part of a series of
motorcycle stunt events produced by Kevin Ruic, whose company, FASCAR North, had
previously sold the rights thereto to the Company. The Company believes it has
meritorious defenses to the Wise Action, and potential cross-actions, but at
this point has not completed its investigation into the facts concerning this
matter. Preliminarily, the Company does not believe there is insurance coverage
for this action. If there is no insurance coverage, it is possible that the
Company could be forced to incur substantial litigation costs, and that any
adverse ruling in this action could be material.
However, the exact outcome will depend significantly on how the Company's
Chapter 11 case proceeds. The claims against the Company are part of the pool
of general pre-petition unsecured debt. Unless these claims are resolved
through a negotiated settlement, they would be adjudicated through an adversary
proceeding in the Bankruptcy Court or litigation in the existing forum.
Regardless, in light of all of the foregoing considerations, the outcome of the
Wise Action is not expected to be materially adverse to the Company.
Other Litigation and Claims
The Company is named as a defendant in other legal actions arising from its
normal operations, and from time-to-time is presented with claims for damages
arising out of its actions. The Company anticipates that any damages or
expenses it may incur in connection with these actions, individually and
collectively, will not have a material adverse effect on the Company. Any
claims existing prior to July 17, 2001 are subject to the automatic stay
provisions of section 362 of the Bankruptcy Code, and are subject to resolution
as part of the Company's pool of unsecured, pre-petition obligations.
Item 2. Changes in Securities and Use of Proceeds.
During May and June 2001, the Company issued 18,000 shares of Easyriders,
Inc. stock to two employees and one ex-employee of the Company upon the exercise
of stock options granted under the 1998 Executive Incentive Compensation Plan.
The shares were valued at the price at which they were sold on the American
Stock Exchange.
During June 2001, the Company issued 30,000 shares of Easyriders, Inc.
common stock to two members of the Board of Directors of the Company as
compensation for serving as chairmen of board committees. The shares were
valued at their market price, market price being determined as the closing price
of the Common Stock on the American Stock Exchange on the date of issuance.
The transactions described above were exempt from the registration
requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2)
thereof.
Item 3. Defaults Upon Senior Securities
The Nomura Credit Agreement sets forth two types of obligations on the part
of the Company:
32
. Payment-Related Obligations: Payments in respect of interest, principal
---------------------------
reduction and pay-off at maturity.
. Covenant-Related Obligations: Obligations to maintain certain financial
----------------------------
ratios, and to do or not do certain things, which obligations are designed
to avoid impairment of Nomura's credit position and the value of its
collateral.
In November of 2000, Nomura asserted that the Company was in default with
respect to numerous Covenant-Related Obligations. Management took issue with
each of these charges, and in good faith believed that no events of default had
occurred. As of March 31, 2001, the Company reported that it was in default as
to certain Covenant-Related Obligations.
In view of the Company's anticipated inability to repay the entire
principal on such date, and Nomura's unwillingness to accept a lesser amount, or
to extend the maturity date, in or about May, 2001, management began discussing
with Nomura the possibility of filing for Chapter 11 relief, which led to
protracted negotiations concerning a Cash Collateral Stipulation (the "CCS").
The CCS was based upon a detailed budget which Nomura reviewed and ultimately
approved, subject to reserving all of its rights under the Nomura Credit
Agreement. Easyriders, Inc. and Paisano Publications filed petitions for
Chapter 11 bankruptcy relief on July 17, 2001, and the CCS was formally approved
by the Bankruptcy Court on July 20, 2001. In accordance with the CCS and the
CCS Budget, the Company has paid in full the Nomura interest payments for the
months of May, June and July 2001. The Company's payment obligations to Nomura
are presently governed by the CCS, with which the Company is in full compliance.
The CCS is presently scheduled to expire on August 31, 2001, but a motion
to continue its effectiveness has been filed by the Company and is scheduled to
be heard on August 21, 2001. The Company believes that the CCS will continue to
govern the Company's operations and payment obligations for the duration of the
Chapter 11 cases, but there can be no assurance that this will be the case. The
Company anticipates it will be able to comply with all payment obligations to
Nomura under the CCS, if it is extended. Even if the CCS is not extended,
during the pendency of the Chapter 11 case, Nomura is prevented from foreclosing
on its collateral under the automatic stay provisions of the Bankruptcy Code.
Under such circumstances, Nomura would have to seek and obtain relief from the
automatic stay imposed by section 362 of the Bankruptcy Code.
Item 4. Submission of matters to a vote of security holders
At the Company's Annual Meeting of its Stockholders held on June 21, 2001
(the "Annual Meeting"), the stockholders of the Company approved the following
proposals:
Proposal 1. Election of Directors
The following persons were elected as directors of the Company at the
Annual Meeting to hold office for a term of one year or until their successors
have been duly elected and qualified:
33
Name Votes For Votes Withheld
--------------------------------------------------------
Joseph Teresi 17,682,717 16,525
Stewart G. Gordon 17,682,717 16,525
Joseph J. Jacobs 17,682,517 16,725
John P. Corrigan 17,682,717 16,525
George N. Riordan 17,682,717 16,525
Proposal 2. Ratification of Independent Auditors
The appointment by the Board of Directors of the Company of Stonefield
Josephson, Inc. as the Company's independent auditors for the fiscal year ending
December 31, 2001 was ratified with 17,691,091 votes for the proposal, 6,075
votes against the proposal, 2,076 votes abstaining, and 0 broker non-votes.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
Current Report of the Company on Form 8K, as filed on June 5, 2001.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EASYRIDERS, INC.
----------------
(Registrant)
Dated: August 16, 2001 /s/ J. Robert Fabregas
-----------------------------------
J. Robert Fabregas
Chief Executive Officer and Chief
Financial Officer
35